China trumps U.S. for foreign investment

PaulHannon

China became the world's top destination for foreign investment in 2014, edging the U.S. out of the top position for the first time since 2003, according to figures released Thursday by the United Nations Conference on Trade and Development.

China's elevation is part of a longer-term switch in foreign investment toward developing and away from developed economies. While investment in developing economies rose 4% in 2014, investment in developed economies fell by 14%.

Overall, that left overseas investments by businesses down 8% from 2013 at $1.26 trillion, the lowest level since 2009, when the global economy was in recession following the onset of the financial crisis.

The continued weakness of foreign investment is a testament to the long-lasting nature of the economic damage caused by the financial crisis, as well as rising geopolitical tensions. Foreign investment in Russia collapsed in 2014 following the country's March annexation of Ukraine's Crimea region.

"Companies are still not yet in the mood and mode for expansion," said James Zhan, director for investment and enterprise at Unctad.

Unctad said it doesn't expect a significant recovery in foreign investment this year.

"The fragility of the world economy, with growth tempered by hesitant consumer demand, volatility in currency markets and geopolitical instability will act as a deterrent for investors," Unctad said in a report. "The decline in commodity prices will also lower investments in the oil and gas and other commodity industries."

One lasting consequence of the financial crisis has been the shift in foreign investment away from developed economies. Developing economies attracted 56% of all overseas investments by businesses, up from 52% in 2013 and double their precrisis share.

Indeed, the U.S. was the only developed economy among the top five recipients of foreign investment, with Hong Kong, Singapore and Brazil among that group.

China has been threatening to overtake the U.S. for a number of years as its economy has grown rapidly to become the world's second largest.

"China has been steady with modest growth over the past few years, and it is expected to continue," said Mr. Zhan. "There have been structural changes in inflows to China, from manufacturing toward services, and from labor-intensive to tech-intensive."

But it might not have done so in 2014 were it not for Verizon's purchase of $130 billion worth of shares in a joint venture from Vodafone of the U.K. The Vodafone sale counted as a reduction in foreign investment in the U.S. And with the U.S. economy set to grow more rapidly than most other developed economies, it is possible it will once again become the leading destination for foreign investment.

The U.S. wasn't alone among developed economies in suffering a decline in foreign investment during 2014. With the eurozone economy trapped in a long sump, businesses cut their investments in Germany by $2.1 billion and their investments in France by $6.9 billion. As the U.K. returned to rapid economic growth, foreign investment rose to $61 billion, making it the largest European destination for foreign investment.

While developing countries as a whole attracted an increased share of total investment, some regions fared better than others. Asia led the way, with a 15% rise in foreign investment to an all-time high of $492 billion. By contrast, foreign investment in Latin America fell 19% to %153 billion after four years of increase, while foreign investment in Africa fell 3% to $55 billion.

But the region that suffered the largest decline outside the U.S. was Eastern Europe and the former Soviet Union, known by the United Nations as the "transition economies." With concerns about the conflict in eastern Ukraine and western sanctions against Russia contributing to a halving of foreign investment to $45 billion. Foreign investment in Russia alone fell 70%, while foreign businesses cut their investments in Ukraine by $200 million.

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